Regulation

Recently the FCA published a consultation paper entitled 'Our Future Mission' intended to generate a discussion about the way in which it pursues its statutory objectives in the future.

Since 2014, the FCA's remit has altered significantly as it has taken on a large number of firms from the consumer credit space. The FCA now supervises approximately 56,000 firms and has faced significant challenges with respect to resourcing and expertise.

Chief Executive of the FCA, Andrew Bailey, provides a foreword to the mission statement in which he explains that the FCA has been challenged by a number of crises in recent times. He singles out four, in particular, as 'conduct crises':

mis-selling of payment protection insurance;

Libor and FX manipulation;

the mis-sale of interest rate hedging products in wholesale markets; and

The mission statement includes a number of messages for firms about how the FCA intends to conduct itself in the future, with a particular emphasis on its increased commitment and willingness to explain its decisions.

Firms have until 26 January 2017 to respond to the mission statement.

Read our insight for a more detailed note on the key themes that TLT has drawn from the FCA’s Mission Statement.

The FCA recently issued a consultation paper setting out proposals for standardising the disclosure of transaction costs incurred by pension investments. Independent governance committees and trustees have a duty to request and report on transaction costs as far as they are able to do so. But there is currently no such duty on asset managers to provide a full disclosure of these costs in a standardised form.

As a result, the FCA is looking to place a duty on asset managers to disclose aggregate transaction costs to pension schemes that invest in their funds in a standardised form. The aim is to produce a higher level of consistency in how transaction costs are reported.

The FCA's proposals include:

placing a duty on asset managers to disclose aggregate transaction costs to pension schemes (both workplace personal pension and occupational schemes) that directly or indirectly invest in their funds;

requiring asset managers to provide a breakdown of transaction costs on request, with the total broken down into categories of identifiable costs;

requiring the disclosure to be based on a comparison of actual prices with the value of the asset immediately before the order to transact entered the market (the slippage cost approach);

In April 2016 the FCA published the interim report of its investment and corporate banking market study, which focused on primary market activities in the UK (equity capital market, debt capital market and merger and acquisition services). Having considered the consultation feedback and carried out further work, the FCA has now confirmed its interim findings as final.

The FCA has developed a targeted package of remedies to address concerns surrounding competition in the market and ensuring protection for smaller clients:

Banks are now banned from using contractual clauses that seek to limit clients’ choice on future transactions.

Banks can no longer present league tables to a client in a manner that inflates their position.

Incentives are being removed for loss-making trades to climb league tables (for example, league tables that rank investment banks can be misleading because some banks carry out loss-making transactions purely to generate a higher position in such tables).

A supervisory programme for initial public offering (IPO) allocations will be introduced to prevent allocations of shares in IPOs being skewed towards buy-side investors from whom banks derive greater revenues from other business lines.

Firms should take this report as a signal that the FCA expects competition on merits, not by restricting choice, drawing misleading comparisons, or exploiting conflicts of interest.

For more information and a link to the report discussed above, visit the FCA’s website.

The FCA has issued a thematic review to assess how firms have been implementing the packaged bank accounts rules held within the Insurance: Conduct of Business Sourcebook (ICOBS, particularly ICOBS 5.1.3).

These rules require firms to establish and record customers' eligibility to claim on the insurance policies in their packaged bank account and to send customers annual eligibility statements prompting them to review their eligibility.

The FCA still recognises that there is a place in the market for packaged bank accounts, as they can provide good value and convenience for customers. However, the FCA remains concerned about the risk that customers suffer detriment if they rely on one or more policies to then find out that they are ineligible to claim.

The overall message from the thematic review is that firms need to do more to ensure that their customers are treated fairly both when they take out a package bank account and when they complain about their cover.

The FCA's headline findings are as follows:

Checking eligibility

Whilst market practice has improved in this area, the FCA has identified that firms are not consistently checking eligibility for each type of insurance in a package. Findings also showed that firms' records lacked enough detail to demonstrate that eligibility has been established for all types of insurance.

Annual eligibility statements

Throughout the term of an insurance policy included in a package, a firm must provide the customer with an annual eligibility statement setting out any qualifying requirements to claim and recommending that the customer review and consider whether they meet these requirements.

The FCA has found that most firms are including appropriate information within the statements but there remains room for improvement in designing the statements in a way that increases customers' engagement.

Complaint handling

The FCA has found that firms are not consistently delivering fair outcomes for customers complaining that their package bank account was mis-sold. However, this review took place at a time when the number of packaged bank account claims was increasing and firms would not, at that time, have fully implemented the lessons from its thematic review of complaint handling.

The FCA plans to undertake an additional review of complaints received between March and May 2016 to test whether steps taken in most recent years have raised standards.

But firms should note that the FCA's findings have led to the regulator questioning how consistently firms are achieving fair outcomes for customers. As such, firms should be considering how these findings apply to their business in anticipation of further focus on this area in the future.

For more information and a link to the thematic review discussed above, visit the FCA’s website.

Speeches and communications

The FCA’s Director of Strategy and Competition, Christopher Woolard, delivered a speech at the LendIt Conference 2016 emphasising the development of the crowdfunding market over recent years and the FCA’s intention to assess whether the regulatory framework for the industry remains fit for purpose.

Mr Woolard recognised that the regulator still has the same objectives for the market since the introduction of its regime for peer-to-peer in 2014. Promoting competition, protecting consumers and enhancing the integrity of UK markets underpins the logic for the FCA’s creation of a crowdfunding regime in the UK and the regulator continues to want to see this innovative market flourish.

Mr Woolard recognises that the authorisation process remains demanding. However, he states that challenging a firm’s business model and probing for further information helps firms to get on a stronger footing within the market. In support of this, Mr Woolard highlights that, at the end of September 2016, the FCA had authorised 12 platforms and 39 were operating with interim permission.

Mr Woolard states that at this stage, consumer confidence is paramount. He explains that both sides need to understand what due diligence the firm is going to do and what investors need to do for themselves. The market must reflect the nature of relationship accurately and firms must be transparent about performance and use of financial support.

Many of these priorities hold true for the regulator across several industry areas. However, Mr Woolard emphasises how serious the regulator is about ensuring protection for consumers within the crowdfunding space. He states that the regulator wants ‘innovation, but [it] will not compromise on market integrity or consumer protection’.

Firms within the crowdfunding market should expect the FCA’s comments on the future of the industry before the end of 2016 and should be ready to implement any changes in order to respond to the regulator’s requirements.

For more information and a link to the speech discussed above, visit the FCA’s website.

The FCA has issued guidance after considering how firms calculate contractual monthly instalments (CMI) for mortgage customers with payment shortfalls.

As a result of its investigations, the FCA has found that some firms have automatically included customers' payment shortfall balances within CMI calculations but continue to treat the payment shortfall as outstanding and pursue the payment separately through their collections process.

The FCA has determined this practice to be "automatic capitalisation" and results in firms collecting the payment shortfall balance over the remaining terms of the mortgage, whilst also treating them as immediately payable. Customers are therefore making overpayments towards their mortgage balance and are been treated unfairly as a result.

The FCA has requested that firms amend this practice and set out a proposed remediation framework for doing so. The use of the framework is not mandatory but the FCA expects firms to determine a remediation approach to achieve fair outcomes for affected customers (which the FCA has determined to be approximately 750,000 customers and roughly 66% of the market share).

Firms should therefore:

review whether they have automatically included payment shortfalls in their CMI calculation in respect of regulated mortgages and home purchase plans since 25 June 2010;

review whether this practice has caused harm to customers and provide appropriate remediation if required;

explain to affected customers the impact of automatic capitalisation and what steps are being taken to remedy the situation (in a way that is clear, fair and not misleading); and

make changes to the necessary policies, procedures and systems in place in order to comply with the FCA's requirements, including considering whether terms and conditions are consistent with those requirements.

The FCA has proposed that firms notify all customers who are in scope for remediation before 30 June 2017 and remediation programmes concluded within the following 12 months.

The deadline for responses to the above consultation paper is 18 January 2017.

For more information and a link to the guidance discussed above, visit the FCA’s website.

The FCA has issued guidance on the requirement to serve a default notice before enforcing a guarantee or indemnity following breach of a regulated credit agreement or a regulated consumer hire agreement. This is outlined in section 87 of the Consumer Credit Act 1974 (CCA).

The FCA previously consulted on draft guidance on 19 February 2016 in which it set out its view that a default notice is required if a lender wishes to take payment from a guarantor following non-payment by the borrower. In response to this consultation, firms expressed concern around the future availability of guarantor loans, poor consequences for an individual’s credit record and the possibility of extending the period of the arrears resulting in an increase of interest and default fees for the customer.

In its revised guidance issued on 25 October 2016, the FCA states that it does not agree with the adverse consequences suggested by responses. However, in an effort to clarify the position, the FCA does provide more specific guidance around when to report defaults to credit reference agencies and why this is not impacted by meeting the requirements of section 87 of the CCA.

The FCA’s revised guidance also clarifies that a guarantee is enforced if, following breach of the agreement by the borrower, the lender:

demands payment by the guarantor; or

takes payment from the guarantor by using a CPA or direct debit mandate without appropriate prior notification to the guarantor.

A guarantee is not enforced if:

payment is made voluntarily by the guarantor following notification of the borrower’s default and without any element of compulsion; or

the lender requests payment by the guarantor but makes clear that it is not a demand for repayment.

The FCA stresses the importance of giving the guarantor reasonable notification and would expect lenders to inform guarantors of the fact that the borrower has defaulted, the amount overdue as a result, the likely timing of payment being taken and the guarantor’s right to cancel the authority (whilst making clear this does not extinguish their obligations under the guarantee).

Under this guidance, lenders therefore have three options when taking enforcement action:

issue a default notice and wait 14 days;

obtain the guarantor’s express consent to payment being taken; or

pre-notify the guarantor and wait a reasonable period, during which the guarantor can cancel the authority.

Firms are asked to respond to this guidance by 25 November 2016. Following this date, the FCA will consider responses and issue finalised guidance.

For more information and a link to the guidance discussed above, visit the FCA’s website.

Enforcement

The FCA has fined Aviva Pension Trustees UK Limited and Aviva Wrap UK Limited for failing to effectively oversee its outsourced providers in relation to the protection of client assets. The FCA took this opportunity to remind firms that regulated activities can be delegated but not abdicated. Firms should therefore take this example as a warning that the FCA expects firms to have robust controls in place to oversee their processes and ensure that they comply with the Client Assets Sourcebook.

For more information and a link to the announcement discussed above, visit the FCA’s website.

The FCA has fined Sonali Bank (UK) Limited £3,250,600 and has imposed a restriction, preventing it from accepting deposits from new customers for 168 days. It has also fined the bank's former MLRO, Steven Smith, £17,900 and prohibited him from performing the MLRO or compliance oversight functions at regulated firms.

This is further proof that firms are consistently at risk from those seeking to launder money through their business. The FCA has asked for firms to be robust in their AML controls and has reiterated that the fight against money laundering generally is an "issue of extreme importance". Firms should therefore note that the FCA will not hesitate to take action against firms and individuals who fall short of its standards.

For more information and a link to the announcement discussed above, visit the FCA’s website.

The FCA has banned Andrew Barry Hart, the sole director, controller and ultimate owner of Wage Payment and Payday Loans Limited (WPPL), from performing any role in regulated financial services. The FCA has also cancelled WPPL's interim permission and refused its applications for WPPL to be authorised to carry out regulated activities.

The FCA's decision follows the Decision Notices published in July this year and the referral of those notices to the Upper Tribunal (Tax and Chancery Chamber). However, these references have since been withdrawn and the FCA has continued with its enforcement decisions.

When commenting on the decision, the FCA noted that there is "no place in an FCA-regulated consumer credit market for firms…or senior managers…who lack the requisite integrity and competence to ensure customers are treated fairly and all relevant regulatory obligations are met".

For more information and a link to the announcement discussed above, visit the FCA’s website.

FCA agrees a redress package with debt purchaser Motormile Finance

Motormile Finance UK Limited (Motormile) has agreed with the FCA to provide redress to more than 500,000 customers for inadequate systems and controls over its due diligence and collections process. The firm failed to conduct sufficient due diligence when purchasing a debt portfolio to ensure that the sums due under customer loan agreements were correct, which resulted in unfair and unsuitable customer contact during recovery.

The agreed redress package is £154,000 in cash payments to customers and the writing-off £414 million of debt. Since February 2015, Motormile has been working with the FCA to improve its existing loan portfolios and collections processes (including due diligence) in order to improve its systems and mitigate any identified risk. This has resulted in the FCA agreeing to authorise Motormile in August 2016 and recognise that its issues are historical.

This evidences the importance for firms to conduct sufficient due diligence and demonstrates the impact that it can have on treating customers fairly. The FCA is continuing its reforms in the credit sector and debt purchasers (and sellers) should recognise that they have regulatory obligations to their customers to consider whenever they are disposing of debt or other customer relationships.

For more information and a link to the announcement discussed above, visit the FCA’s website.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions.